Dealers have redefined advisors’ role as “relationship managers”

By James Langton | February 2003

Financial advisors are the gate through which most retail investors pass on their way into the markets, but industry and regulatory trends may be minimizing the advisor’s role. Increasingly retail clients are being bundled into managed money products and are being discouraged from investing directly in the rough-and-tumble equity markets — for better or worse.

Between chronically weak equity markets, overbearing regulators and profit-centered risk-averse dealers, the role of financial advisors has come under pressure. Yet these poor equity markets should be heralding a renaissance for financial advice — investors have learned all too well that they can’t secure their retirement years by banging their money into any old tech stock. They need planning and guidance. This should be a perfect opportunity for advisors to step up and show what they can do.

But it’s not clients who are shying away from advisors. The shifting attitudes can be laid more squarely at the feet of the dealers and regulators. To fight the abuses that commission-based selling has engendered, the dealers have redefined the advisors’ role as “relationship manager.”
The best place for clients assets have become managed products, be they third-party mutual funds or the more profitable house wrap programs, which charge clients an annual fee based on assets under management.

Dealers are pushing their clients into in-house managed money programs for obvious reasons. They provide the firms with a steady income stream and minimize their reliance on volatile trading activity. They also tie the client more closely to the firm than to the advisor; if an advisor decides to move firms, it is harder to take his or her clients along. In-house managed money programs are generally not portable and clients wanting to follow their advisors would trigger capital gains taxes if they left the program. It keeps the assets where they are and maintains a stable income stream for the firm.

And it seems to be working. By one estimate, the compound annual growth rate for these programs is more than double the overall growth rate for disposable financial assets of the affluent — meaning they are grabbing market share aggressively.

Expensive managed-money plans justify their costs through layers of managers, manager monitors, asset-allocation screens and assorted other middlemen.
These structures not only jack up the client’s bill, they also distance clients from the vagaries of the markets, minimizing risk.
Portfolio performance is now sheltered in the hands of a series of managers, pushing the advisor and the client ever further from the action. Poor performance is the fault of a distant money manager who can eventually be fired.

In the days when clients actually traded stocks, on the other hand, if their portfolios tanked, advisors would be accused of ignoring suitability, unauthorized trading, churning and a multitude of other sins. Managed products reduce some of these risks, as the rogue has yet to be built that can churn a wrap account. Firms certainly prefer this situation, although it’s not clear whether it works as well for clients over the long term.

Advisors aren’t entirely prevented from offering advice these days. In fact, firms actively tout their financial planning services.
However, much of this advice is automated, using software that cranks out those plans, keeping the costs of advice low. Not only is real advice expensive and time-consuming, but there is a danger in having active, engaged advisors. They are less likely to sell house products and underwritings — such as the rash of income trust offerings that the firms’ investment bankers have been cranking out.

The big firms’ appetite for managed money and implicit distrust of advisors is matched only by that of the regulators.

For firms, the appeal of minimizing the role of advisors and shepherding clients into professionally managed products is obvious. It’s less obvious for regulators.
Perhaps it goes back to the registration process, which former regulator Glorianne Stromberg has called little more than a fee-collecting exercise. If registration required high standards of competence or professionalism, regulators could be more comfortable about advisors dealing with the public.

But registration doesn’t provide that sort of assurance and the sophistication of retail investors remains dubious. The only avenue left open to regulators is to protect investors by scrutinizing advisors’ conduct and child-proofing the products they may sell.
The Canadian Securities Administrators highlighted the danger in mid-January when it announced that advisors create most of the complaints it receives from investors.
Issues such as suitability, unregistered sales or distributions and customer service were all cited among the top complaints.

Rather than discrediting advisors, the CSA’s announcement was primarily an exercise in investor education — aimed at raising clients’ consciousness about the sort of problems they could face, and how to avoid them.